The British pound is lower against the euro on Wednesday after data showed a more tepid pace of UK inflation than expected. At the same time data showed German economic growth slowed substantially in 2019 but the slowdown was in line with expectations.
GBP/EUR was lower by 36 pips (-0.31%) to 1.1167 as of 1pm GMT, leaving the currency pair near the bottom of its 5-day range and just above lows made in December. The British pound had firmed against the euro at the start of trading on Wednesday but encountered resistance at €1.17. The Initial gains turned into losses once trading got underway in Europe.
UK inflation during December fell at a faster pace than expected in data released Wednesday morning. There were missed expectations across a range of calculations for inflation, including consumer prices, retail prices and producer prices. The Consumer Price Index (CPI) for December rose only 1.3% year-over-year, missing consensus forecasts of a 1.5% y/y rise after a reading of 1.5% in November.
The softer UK inflation is increasing expectations that the Bank of England will cut interest rates in the coming months, perhaps as soon as its meeting on January 30th. Indeed on Wednesday another Bank of England policymaker Michael Saunders said it was probably appropriate to cut UK interest rates. Saunders is already a known dove, so his dovish comments only hit the currency once the inflation data was seen.
German GDP growth was only 0.6% in 2019, a year in which the country flirted with recession thanks to a big contraction in manufacturing activity. The news did not hamper the euro too heavily since the weakness of the economy by this point is well understood. Looking forward there seems to be no clear path to recovery in some of Germany’s most important heavy goods industries. New environment regulations, including standards on climate change will put pressure on manufacturers. The automotive sector faces specific industry challenges which look unlikely to pass in 2020 as carmakers try to produce and sell electric vehicles.